Martin Lewis has shared a sobering rule of thumb for pension savings that may make many reconsider their financial planning. In the latest edition of his Money Saving Expert newsletter, the founder focused on pensions, offering guidance on finding lost savings and maximizing investments. Among the advice, he revealed what he called a 'scary, old, famous, very rough rule of thumb' to determine how much you should be setting aside for retirement.
The Rule: Halve Your Age for a Percentage
Lewis explained: 'Take the age when you start putting money in your pension, halve it, and that's the percentage of your salary to aim to put into your pension for the rest of your working life for a strong retirement income. So start at 20 and it’s 10% (this includes employer’s contributions); at 40 it’s 20%.'
This means a 40-year-old on the average UK salary for their age (£40,040) would need to invest £8,008 into their pension this year alone. For a 20-year-old on the average wage of £22,932, the figure is £2,293.20. These amounts will vary with earnings and employer contributions, but the formula provides a stark starting point.
Start Early, Benefit from Compounding
Lewis emphasized the importance of starting early: 'Most people unfortunately won’t get there. Yet the real message to take is that the earlier you start, the better, as you’ve longer for gains to compound.' The MSE website notes that most people cannot contribute enough initially for the half-your-age rule, so it recommends starting with whatever you can.
It is also advised to save a set proportion of your salary each month rather than a fixed amount, so your savings grow with your earnings. Lewis offered an additional tip: 'Every time you get a pay rise, if possible, put a chunk of that into your pension before you get used to the increase.' This helps avoid lifestyle creep and ensures consistent saving.
Practical Steps for Better Retirement Planning
While spending in the present is necessary, thinking about your future self can motivate better saving habits. Lewis's rule is a useful tool to kickstart retirement planning, even if it may seem daunting. The key is to begin as early as possible and increase contributions over time.
